Tag: audit firm rotation

Will the call for mandatory audit firm rotation be renewed?

Starting in 2018, new rules required disclosure of auditor tenure in audit reports. (See this PubCo post.) And, for some companies, those tenures can stretch over a century. For example, KPMG reported that it has audited GE since 1909. (See this PubCo post.) According to this press release from the American Accounting Association,  for “the first 21 companies of the Dow 30 to release their reports this year, the average auditor tenure is 66 years.”  But long auditor tenure has its critics and its fans.  Some argue that long tenure can adversely affect auditor independence and objectivity, while others contend that long tenure avoids the time loss and distraction of having to “onboard” new auditors, provides deep institutional knowledge—leading to higher audit quality—and offers cost savings resulting from that familiarity. However, a couple of recent academic studies call those suggested benefits into question. The press release cited above and this article in CFO.com report on new academic research that concludes that, among the Big 4 at least, the longer the tenure, the greater the fee, notwithstanding the reduction in effort required of the auditor over time. And this press release from the American Accounting Association reports on another academic study that, contrary to popular assumptions, found a positive correlation between relatively short audit tenure and the speed of discovery of financial misreporting. Will these studies renew calls for mandatory auditor rotation?